HP's blockbuster civil suit against Autonomy's founder took a strange turn when its former CFO admitted she had not read any due diligence before the US software giant splurged $11bn on the acquisition.
Back in 2015, security expert Mikko Hyppönen set up a free WiFi hotspot in the heart of London’s financial district. Nestled in the fine print was a “Herod clause”: by accepting the terms and conditions, “the recipient agreed to assign their first born child to us for the duration of eternity”.
Six people signed up, according to Hyppönen.
His point was that our failure to read the small print could result in unpleasant consequences. We're all guilty of skimming the t&c's in our private lives. However, when you’re the well-remunerated CFO of a major corporation, due diligence is kind-of part of the deal.
No one apparently explained this to HP’s former CFO Cathie Lesjak. Back in 2011, HP was sizing up the acquisition of British software company Autonomy. Lesjak, understandably as CFO, played a key role in these efforts.
The acquisition went ahead and quickly turned disastrous. A year after HP paid $11.1bn (£8.5bn) for Autonomy, the US giant wrote down the value of Autonomy by $8.8bn. HP and its shareholders accused Autonomy of misleading them over the true value of the company; a claim that Autonomy’s founder Mike Lynch strenuously denies.
Years on and HPE’s blockbuster civil lawsuit against Lynch is finally proceeding. For clarity, HP was split into HPE and HP Inc. in 2015. HPE is the enterprise side of the split, focusing on servers, consulting and support, among other things.
Now, with the trial in full swing, old mistakes are coming to light. In a remarkable exchange with Lynch’s barrister, Lesjak admitted she received a preliminary due diligence report from KPMG, but she never read it.
Not only did she never read the preliminary due diligence, no further due diligence whatsoever went ahead after the report. According to The Register, KPMG’s report “was the only external due dil HP commissioned into Autonomy before the former went ahead with the mega-acquisition of the latter in August 2011”.
The Register has helpfully dug up KPMG’s due diligence report, which is available here.
Speaking to AccountingWEB, Clinton Lee, an M&A advisor and consultant at the Exit Firm, was surprised by Lesjak’s omission, labelling the situation “odd”. He added: “Normally, a company of HP’s size would, or should, have a whole team of 20 to 30 people working on the due diligence.”
The reports that stem from these efforts make their way up to board level for approval, Lee explained. “I suspect they had all the reports, but there was perhaps some board level pressure to make a decision in a certain way.”
Lesjak’s testimony yielded another clanger, too: the seasoned CFO said her finance team at HP had not actually calculated the precise losses that HP publicly attributed to Autonomy. In fact, according to HPE’s former CEO Meg Whitman, the firm never spoke with Lynch before going public about the situation.
HP’s former finance chief is not the only accountant caught up in the Autonomy debacle. Shushovan Hussain, Autonomy’s former CFO, was recently jailed for five years after being convicted for accounting fraud related to the acquisition.
Hussain’s misdeeds are a key part of HPE’s case against Lynch. In the two years preceding the Autonomy acquisition, the CFO was found guilty of using sophisticated accounting methods to falsely inflate Autonomy’s revenues to make it appear the business was growing when it was not.
US prosecutors have also charged Lynch and the former Autonomy vice president of finance Stephen Chamberlain. Lynch has denied criminal wrongdoing and Chamberlain has pleaded not guilty. Hussain’s lawyers have said they will appeal his sentence, and the civil trial in London’s High Court is ongoing.